Acquisition Of Sherlock Biosciences Will Expand Molecular Diagnostics Capabilities

Key Takeaways

• The acquisition of Sherlock Biosciences and strategic partnerships are set to bolster OraSure's innovation, diagnostics capabilities, and core business revenue growth.
  
• Operational efficiencies and insourcing production initiatives aim to significantly enhance margins and profitability, focusing on automation and streamlined operations.
  
• Potential disruptions in funding and increased operational costs could impact OraSure's revenue and margins, although strategic investments aim for long-term growth.

Catalysts

Provides point-of-care and home diagnostic tests, specimen collection devices, and microbiome laboratory and analytical services in the United States, Europe, and internationally.

• The acquisition of Sherlock Biosciences is expected to expand OraSure's innovation pipeline and diagnostics capabilities, specifically within molecular diagnostics, projected to drive future revenue growth as the CTNG test receives FDA approval and hits the market.
  
• Improvements in operating efficiency, such as insourcing production activities and consolidating facility footprints, aim to increase net margins as automation and streamlined operations reduce costs and enhance productivity in 2025 and beyond.
  
• Expansions in Sample Management Solutions into emerging fields like oncology and genetic risk assessment are expected to broaden the customer base and offer additional revenue streams as they cater to new market segments.
  
• Streamlining of product packaging and insourcing initiatives are likely to improve gross margins significantly throughout 2025, targeting an adjusted gross margin increase towards 50%, enhancing overall profitability.
  
• Established strategic partnerships and developments of new product offerings, including collaborations with Sapphiros, are projected to contribute to incremental revenue growth and strengthen core business operations, returning the company to growth in 2025.

OraSure Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OraSure Technologies's revenue will decrease by 5.5% annually over the next 3 years.
• Analysts are not forecasting that OraSure Technologies will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate OraSure Technologies's profit margin will increase from -10.5% to the average US Medical Equipment industry of 13.0% in 3 years.
• If OraSure Technologies's profit margin were to converge on the industry average, you could expect earnings to reach $20.4 million (and earnings per share of $0.26) by about March 2028, up from $-19.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.1x on those 2028 earnings, up from -13.3x today. This future PE is lower than the current PE for the US Medical Equipment industry at 28.7x.
• Analysts expect the number of shares outstanding to grow by 1.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.87%, as per the Simply Wall St company report.

OraSure Technologies Future Earnings Per Share Growth

Risks

• Potential uncertainties in funding for international HIV programs, such as PEPFAR and the Global Fund, could result in disruptions, impacting OraSure's revenue from international diagnostics, which makes up a significant portion of the company's core revenue.
  
• Reductions in research funding by the NIH could affect OraSure’s sample management solutions segment, which depends on NIH-related grants for a portion of its revenue, potentially impacting overall earnings from academic and research institutions.
  
• The operational and financial impact of exiting the risk assessment testing business, alongside the associated inventory write-down, may result in decreased future revenue streams and could constrain net margins in the short term.
  
• Changes in tariff policies, particularly for the remaining manufacturing activities in Canada, could increase operational costs, affecting OraSure's cost structure and ultimately its net profit margins.
  
• The ongoing strategic transition and short-term operational investments, such as those related to the Sherlock acquisition, while necessary for long-term growth, require significant upfront costs that could suppress net earnings in the near term.

Valuation

• The analysts have a consensus price target of $5.0 for OraSure Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $6.0, and the most bearish reporting a price target of just $4.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $156.8 million, earnings will come to $20.4 million, and it would be trading on a PE ratio of 23.1x, assuming you use a discount rate of 6.9%.
• Given the current share price of $3.46, the analyst price target of $5.0 is 30.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.